ONCONETIX, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC , onMarch 31, 2022 . . In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. See "Cautionary Note Regarding Forward-Looking Statements." Overview We are a biotechnology company focused on the research and development of transformational vaccines to prevent infectious diseases worldwide. Our versatile vaccine platform has unique molecular properties that enables delivery of various antigens, which can be utilized to develop singular or multi-targeted vaccines. Our lead influenza (flu) vaccine program uses proprietary technology to identify specific epitopes, or proteins of antigens, with cross-reactive properties, that enable the potential development of a universal flu vaccine. We are focused on developing novel vaccines that induce durable and long-term immunity. We believe that our pipeline and vaccine platform are synergistic for developing next generation preventive vaccines to improve both health outcomes and quality of life globally. [[Image Removed]] Since our inception inOctober 2018 , we have devoted substantially all of our resources to performing research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, hiring personnel, acquiring and developing our technology and vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have financed our operations primarily with proceeds from our sale of preferred securities to seed investors, the close of our initial public offering, and the close of a private placement. We will continue to require additional capital to develop our vaccine candidates and fund operations in the long-term. Accordingly, until such time as we can generate significant revenue from sales of our vaccine candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. 21
We have incurred net losses since inception and expect to continue to incur net losses in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in large part on the timing of our preclinical studies, clinical trials and manufacturing activities, and our expenditures on other research and development activities. As ofMarch 31, 2022 , the Company had working capital of approximately$16.4 million and an accumulated deficit of approximately$7.9 million . We will need to raise additional capital to sustain operations and meet our long-term operating requirements beyond the one year period following the issuance of the accompanying financial statements. While we believe that we can raise additional capital to fund our planned operations, until we generate revenue sufficient to support self-sustaining cash flows, if ever, we will need to raise additional capital to fund our continued operations to execute our long-term business plan, including our product development and commercialization activities related to our current and future products. There can be no assurance that additional capital will be available to us on acceptable terms, or at all, or that we will ever generate revenue sufficient to provide for self-sustaining cash flows. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our vaccine candidates, which we expect will take a number of years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
? advance vaccine candidates through preclinical studies and clinical trials;
? require the manufacture of supplies for our preclinical studies and
clinical trials;
? pursue regulatory approval of vaccine candidates;
? hire additional personnel;
? operate as a public company;
? acquire, discover, validate and develop additional vaccine candidates; and
? obtain, maintain, expand and protect our intellectual property portfolio.
We rely and will continue to rely on third parties in the conduct of our
preclinical studies and clinical trials and for manufacturing and supply of our
vaccine candidates. We have no internal manufacturing capabilities, and we will
continue to rely on third parties, of which the main suppliers are single-source
suppliers, for our preclinical and clinical trial materials. Given our stage of
development, we do not yet have a marketing or sales organization or commercial
infrastructure. Accordingly, if we obtain regulatory approval for any of our
vaccine candidates, we also expect to incur significant commercialization
expenses related to product sales, marketing, manufacturing and distribution.
Because of the numerous risks and uncertainties associated with vaccine
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate revenue from the sale of our vaccines, we may not become
profitable. If we fail to become profitable or are unable to sustain
profitability on a continuing basis, then we may be unable to continue our
operations at planned levels and may be forced to reduce our operations.
22
Certain Significant Relationships
We have entered into grant, license and collaboration arrangements with various third parties as summarized below. For further details regarding these and other agreements, see Note 5 to each of our audited financial statements included in the Form 10-K and unaudited financial statements included elsewhere in this
Report. Ology Agreement InJuly 2019 , we entered into a development and manufacturing master services agreement withOlogy Bioservices (which was later acquired byNational Resilience, Inc. ) ("Ology"), as amended, which we refer to as the Ology Agreement, pursuant to which Ology is obligated to perform manufacturing process development and clinical manufacture and supply of components.
Under the Ology Agreement, we will pay Ology agreed upon fees for Ology's performance of manufacturing services and regulatory support, and we will reimburse Ology for its out-of-pocket costs associated with purchasing raw materials, plus a customary handling fee.
OnApril 20, 2022 , the Company and Ology entered into a first amendment to the second Project Addendum (the "Ology Amendment"). The Ology Amendment provides for an increase to the Company's obligation of$0.3 million , specifically related to regulatory support on the project.
For additional details regarding our relationship with Ology, see Notes 5, 7 and 11 to our financial statements included elsewhere in this Report.
OnJune 1, 2021 , we entered into an exclusive, worldwide license agreement withChildren's Hospital Medical Center , d/b/aCincinnati Children's Hospital Medical Center , or CHMC, which we refer to as the CHMC Agreement, pursuant to which we obtained the right to develop and commercialize certain CHMC patents and related technology directed at a virus-like particle (VLP) vaccine platform that utilizes nanoparticle delivery technology, which may have potential broad application to develop vaccines for multiple infectious diseases. Under the CHMC Agreement, we agreed to pay CHMC certain license fees, deferred license fees, development milestone fees, and running royalties beginning on the first net sale (among others). For additional details regarding our relationship with CHMC, see Note 5 to our financial statements included elsewhere in this Report. The CHMC license includes: U.S. Patent Granted Claim Foreign Application No. U.S. Patent No. Type U.S. Expiration Counterparts 12/797,396 8,486,421 Compositions of 1/13/2031 CN107043408B the EP2440582B1 vaccine/vaccine JP5894528B2 platform 13/924,906 9,096,644 Method of 9/20/2030 CN107043408B treatment EP2440582B1 JP5894528B2 13/803,057 9,562,077 Compositions of 4/10/2034 none the vaccine platform 16/489,095 pending pending [3/15/2038]* Pending applications in Canada, China, EU and Japan 63/149,742 pending pending [February 2042]# TBD (filed 2/16/2021) 63/162,369 pending pending [March 2042]# TBD (filed 3/17/2021)
* Projected expiration if patent issues: 20 years from earliest non-provisional
application filing date.
# Non-provisional application not yet filed. Expiration projected 21 years from
provisional application filing date. Dependent on timely conversion to
non-provisional application and issuance of patent.
** This is a pending application. Claim type will be determined after
the vaccine and vaccine platform.
23
Oxford University Innovation Limited Agreement
OnJuly 16, 2019 , we entered into an exclusive, worldwide license agreement withOxford University Innovation Limited , which we refer to as the OUI Agreement, pursuant to which we obtained the right to develop and commercialize certain licensed technology entitled "Immunogenic Composition." Under the OUI Agreement, we agreed to fund three years' worth of salaries for Dr.Craig Thompson in theUniversity' Department of Zoology through a sponsored research agreement withOxford University , as well as royalties on all net sales of licensed products, along with certain development and milestone payments (among others). For additional details regarding our relationship with OUI, see Note 5 to our financial statements included elsewhere in this Report. The OUI license includes: U.S. Patent Granted Claim Foreign Application No. U.S. Patent No. Type U.S. Expiration Counterparts 16/326,749 11,123,422 Compositions and 8/25/2037 Pending method of applications treatment in Australia, Canada, China, EU and Japan 17/458,712 pending pending [8/25/2037]*
* Projected expiration if patent issues: 20 years from earliest non-provisional
application filing date.
** This is a pending application. Claim type will be determined after
the compositions and method of treatment.
OnJanuary 27, 2020 , we entered into an exclusive, worldwide license agreement withSt. Jude Children's Research Hospital, Inc. , as amended, which we refer to as the St. Jude Agreement, pursuant to which we acquired the right to develop certain licensed products and produce vaccines for use in humans. Under the St. Jude Agreement, we agreed to pay an initial license fee, an annual maintenance fee, milestone payments, patent reimbursement, and running royalties based on the net sales of licensed products. OnMay 11, 2022 , the Company and St. Jude entered into a first amendment to the St. Jude Agreement (the "St. Jude Amendment"). The St. Jude Amendment provides for a revised development milestone timeline, a one-time license fee of$5,000 , and an increase to the royalty rate from 4% to 5%. The St. Jude Amendment also provides for an increase to the contingent milestone payments, from$1.0 million to$1.9 million in the aggregate; specifically, development milestones of$0.3 million , regulatory milestones of$0.6 million , and commercial milestones of$1.0 million . For additional details regarding our relationship with St. Jude, see Notes 5, 7 and 11 to our financial statements included elsewhere in this Report. The St. Jude license includes: Foreign U.S. Patent Application No. U.S. Patent No. Granted Claim Type U.S. Expiration Counterparts 14/345,988 9,265,819 Compositions and 9/19/2032 none method of treatment 17/602,414# pending pending [3/12/2040]* Pending Applications in: Australia, Brazil, Canada, China, Europe, Hong Kong, Japan and Korea
* Projected expiration if patent issues: 20 years from earliest non-provisional
application filing date.
#
** This is a pending application. Claim type will be determined after
the compositions and method of treatment.
24
COVID-19 Impacts
We are continuing to closely monitor the impact of the global COVID-19 pandemic
on our business and are taking proactive efforts designed to protect the health
and safety of our employees and to maintain business continuity. We believe that
the measures we are implementing are appropriate, and we will continue to
monitor and seek to comply with guidance from governmental authorities and
adjust our activities as appropriate. Based on guidance issued by federal, state
and local authorities, we transitioned to a remote work model for a vast
majority of our employees in March 2020 . The COVID-19 pandemic has resulted in
an impact to our development timelines, as the pandemic continues, we could
continue to see an impact on our ability to advance our programs, obtain
supplies from our contract manufacturer or interact with regulators, ethics
committees or other important agencies due to limitations in regulatory
authority, employee resources or otherwise. In any event, if the COVID-19
pandemic continues and persists for an extended period of time, we could
experience significant disruptions to our development timelines, which would
adversely affect our business, financial condition, results of operations and
growth prospects.
In addition, while the potential economic impact brought by, and the duration
of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic
could result in significant and prolonged disruption of global financial
markets, reducing our ability to access capital, which could in the future
negatively affect our liquidity. In addition, a recession or market correction
resulting from the spread of COVID-19 could materially affect our business and
the potential value of our common stock.
The extent of the impact of the COVID-19 pandemic on our development and
regulatory efforts, our ability to raise sufficient additional capital on
acceptable terms, if at all, and the future value of and market for our common
stock will depend on future developments that are highly uncertain and cannot be
predicted with confidence at this time, such as the ultimate duration of the
pandemic, travel restrictions, quarantines, social distancing and business
closure requirements in the U.S. and in other countries, and the effectiveness
of actions taken globally to contain and treat COVID-19. For additional
information about risks and uncertainties related to the COVID-19 pandemic that
may impact our business, financial condition and results of operations, see the
section titled "Risk Factors."
Components of Results of Operations
Research and Development Expenses
Substantially all of our research and development expenses consist of expenses
incurred in connection with the development of our product candidates. These
expenses include fees paid to third parties to conduct certain research and
development activities on our behalf, consulting costs, costs for laboratory
supplies, product acquisition and license costs, certain payroll and
personnel-related expenses, including salaries and bonuses, employee benefit
costs and stock-based compensation expenses for our research and product
development employees and allocated overheads, including information technology
costs and utilities. We expense both internal and external research and
development expenses as they are incurred.
We do not allocate our costs by product candidate, as a significant amount of
research and development expenses include internal costs, such as payroll and
other personnel expenses, laboratory supplies and allocated overhead, and
external costs, such as fees paid to third parties to conduct research and
development activities on our behalf, are not tracked by product candidate.
We expect our research and development expenses to increase substantially for at
least the next few years, as we seek to initiate additional clinical trials for
our product candidates, complete our clinical programs, pursue regulatory
approval of our product candidates and prepare for the possible
commercialization of such product candidates. Predicting the timing or cost to
complete our clinical programs or validation of our commercial manufacturing and
supply processes is difficult and delays may occur because of many factors,
including factors outside of our control. For example, if the FDA or other
regulatory authorities were to require us to conduct clinical trials beyond
those that we currently anticipate, we could be required to expend significant
additional financial resources and time on the completion of clinical
development. Furthermore, we are unable to predict when or if our product
candidates will receive regulatory approval with any certainty.
25
General and Administrative Expenses
General and administrative expenses consist principally of payroll and personnel expenses, including salaries and bonuses, benefits and stock-based compensation expenses, professional fees for legal, consulting, accounting and tax services, including information technology costs, and other general operating expenses not otherwise classified as research and development expenses. We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, expanded infrastructure and higher consulting, legal and accounting services costs associated with complying with the applicable stock exchange and theSEC requirements, investor relations costs and director and officer insurance premiums associated with being a public
company. Results of Operations
Comparison of the Three Months Ended
The following table summarizes our statements of operations for the periods
indicated:
Three
Three Months Months
Ended Ended
March 31, March 31,
2022 2021 $ Change % Change
Operating costs and expenses
General and administrative $ 1,615,569 $ 237,544 1,378,025 580.1 %
Research and development 455,092 88,237 366,855 415.8 %
Total operating expenses 2,070,661 325,781
1,744,880 535.6 %
Loss from operations (2,070,661 ) (325,781 ) (1,744,880 ) 535.6 %
Net loss $ (2,070,661 ) $ (325,781 ) (1,744,880 ) 535.6 %
General and Administrative Expenses
For the three months endedMarch 31, 2022 , general and administrative expenses increased by$1.4 million compared to the same period in 2021. The increase was mainly due to an increase in employee and director compensation, including annual bonus compensation, of approximately$0.5 million , an increase in audit, accounting, and legal services of$0.3 million , and increases in other business activities related to now being a public company of$0.2 million . In addition, during the three months endedMarch 31, 2022 , the Company incurred$0.3 million for a non-recurring termination penalty to the Company's former underwriter, to early terminate the agreement with that underwriter.
Research and Development Expenses
For the three months endedMarch 31, 2022 , research and development expenses increased by approximately$0.4 million compared to the same period in 2021. The increase was primarily attributable to an increase in preclinical development activities of approximately$0.3 million mainly related to BWV-201, and an increase in research and development personnel costs of approximately$0.1 million . 26
Liquidity and Capital Resources
Liquidity and Capital Resources
Since inception, we have devoted substantially all of our efforts to research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, hiring personnel, acquiring and developing our technology and vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities. We do not have any products approved for sale and have not generated any revenue from product sales. We have incurred net losses in each year since inception and expect to continue to incur net losses in the foreseeable future. Our net loss was$2.1 million for the three months endedMarch 31, 2022 . As ofMarch 31, 2022 , we had an accumulated deficit of$8.0 million . We also generated negative operating cash flows of$0.9 million for the three months endedMarch 31, 2022 . OnFebruary 23, 2022 , we completed our IPO in which we received approximately$17.1 million in net proceeds, after deducting the underwriting discount, and offering expenses. In addition, onApril 19, 2022 , we completed a private placement in which we received approximately$7.0 million in net proceeds, after deducting placement agent fees and other initial offering expenses. The Company believes the existing cash atMarch 31, 2022 , together with the net proceeds received upon the close of the private placement, will be sufficient to continue operations, satisfy its obligations and fund the future expenditures that will be required to conduct the clinical and regulatory work to develop its product candidates for at least one year after the date that the accompanying financial statements were issued. However, we will require significant amounts of additional capital to continue to fund our operations in the long term and complete our research and development activities. We will continue seeking additional financing sources to meet our working capital requirements, make continued investment in research and development and make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may even have to cease our operations. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
Future Funding Requirements
Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and general and administrative expenditures. We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to advance our vaccine candidates, expand our corporate infrastructure, including the costs associated with being a public company and further our research and development initiatives for our vaccine candidates. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations in order to execute our long-term business plan. We estimate that, based on our existing cash as ofMarch 31, 2022 , together with the net proceeds received from the private placement, we have cash on hand sufficient to fund our operations for at least the next 12 months. We will need to raise additional capital prior to commencing additional pivotal trials for certain of our vaccine candidates. Until we can generate a sufficient amount of revenue from the commercialization of our vaccine candidates or from collaboration agreements with third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The future sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financings may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of or eliminate one or more of our research and development programs. 27
Our future capital requirements will depend on many factors, including:
? the timing, scope, progress, results and costs of research and
development, testing, screening, manufacturing, preclinical andnon-clinical studies and clinical trials, including any impacts related to
the COVID-19 pandemic;
? the outcome, timing and cost of seeking and obtaining regulatory approvals
from the FDA and comparable foreign regulatory authorities, including the
potential for such authorities to require that we perform field efficacy
studies for our vaccine candidates, require more studies than those that
we currently expect or change their requirements regarding the data
required to support a marketing application;
? the cost of building a sales force in anticipation of any product
commercialization;
? the costs of future commercialization activities, including product
manufacturing, marketing, sales, royalties and distribution, for any of
our vaccine candidates for which we receive marketing approval;
? our ability to maintain existing, and establish new, strategiccollaborations, licensing or other arrangements and the financial terms of
any such agreements, including the timing and amount of any future
milestone, royalty or other payments due under any such agreement;
? any product liability or other lawsuits related to our products;
? the expenses needed to attract, hire and retain skilled personnel;
? the revenue, if any, received from commercial sales, or sales to foreign
governments, of our vaccine candidates for which we may receive marketing
approval;
? the costs to establish, maintain, expand, enforce and defend the scope of
our intellectual property portfolio, including the amount and timing of
any payments we may be required to make, or that we may receive, in
connection with licensing, preparing, filing, prosecuting, defending and
enforcing our patents or other intellectual property rights;
? expenses needed to attract, hire and retain skilled personnel;
? the costs of operating as a public company; and
? the impact of the COVID-19 pandemic, which may exacerbate the magnitude of
the factors discussed above.
A change in the outcome of any of these or other variables could significantly
change the costs and timing associated with the development of our vaccine
candidates. Furthermore, our operating plans may change in the future, and we
may need additional funds to meet operational needs and capital requirements
associated with such change.
28
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three
Three Months Months
Ended Ended
March 31, March 31,
2022 2021
Net cash used in operating activities (886,091 ) (256,548 )
Net cash used in investing activities (5,197 ) -
Net cash provided by financing activities 17,572,063 -
Net increase (decrease) in cash 16,680,775 (256,548 )
Cash Flows from Operating Activities
Net cash used in operating activities for the three months endedMarch 31, 2022 was$0.9 million , which primarily resulted from a net loss of$2.1 million , and was partially offset by a net change in our operating assets and liabilities of$1.2 million .
Net cash used in operating activities for the three months ended
Cash Flows from Investing Activities
Net cash used in investing activities for the three months endedMarch 31, 2022 was$5,000 , which resulted from purchases of property and equipment. There were no such purchases, or other investing activities during the three months endedMarch 31, 2021 .
Cash Flows from Financing Activities
Net cash provided by financing activities for the three months endedMarch 31, 2022 was$17.6 million , and resulted primarily from the close of our IPO. No financing activities took place during the three months endedMarch 31, 2021 . Legal Contingencies
From time to time, we may become involved in legal proceedings arising from the ordinary course of business. We record a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any
off-balance sheet arrangements as defined in the rules and regulations of the
Recent Accounting Pronouncements Not Yet Adopted
See Note 3 to our financial statements included elsewhere in this Report for more information.
29
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses, fair value of common stock, and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 3 to our financial statements included elsewhere in this Report, we believe the following accounting policies and estimates to be most critical to the judgments and estimates used in the preparation of our financial statements.
We have entered into various agreements with contract manufacturing
organizations, or CMOs, and may enter into contracts with clinical research
organizations, or CROs, in the future. As part of the process of preparing our
financial statements, we are required to estimate our accrued research and
development expenses as of each balance sheet date. This process involves
reviewing open contracts and purchase orders, communicating with our personnel
and third parties to identify services that have been performed on our behalf
and estimating the level of service performed and the associated cost incurred
for the service when we have not yet been invoiced or otherwise notified of the
actual cost. We make estimates of our accrued research and development expenses
as of each balance sheet date based on facts and circumstances known to us at
that time. We periodically confirm the accuracy of our estimates with the
service providers and make adjustments, if necessary. The significant estimates
in our accrued research and development expenses include the costs incurred for
services performed by our vendors in connection with research and development
activities for which we have not yet been invoiced.
We accrue for costs related to research and development activities based on our
estimates of the services received and efforts expended pursuant to quotes and
contracts with vendors, including CMOs, that conduct research and development on
our behalf. The financial terms of these agreements are subject to negotiation,
vary from contract to contract and may result in uneven payment flows. There may
be instances in which payments made to our vendors will exceed the level of
services provided and result in a prepayment of the research and development
expense. Advance payments for goods and services that will be used in future
research and development activities are expensed when the activity has been
performed or when the goods have been received. We make significant judgments
and estimates in determining accrued research and development liabilities as of
each reporting period based on the estimated time period over which services
will be performed and the level of effort to be expended. If the actual timing
of the performance of services or the level of effort varies from our estimate,
we adjust the accrual or prepaid expense accordingly.
Although we do not expect our estimates to be materially different from amounts
actually incurred, if our estimates of the status and timing of services
performed differ from the actual status and timing of services performed, it
could result in us reporting amounts that are too high or too low in any
particular period. To date, there have been no material differences between our
estimates of such expenses and the amounts actually incurred.
Warrants
The Company determines the accounting classification of warrants that are
issued, as either liability or equity, by first assessing whether the warrants
meet liability classification in accordance with ASC 480-10, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, ("ASC 480-10"), and then in accordance with ASC 815-40, Derivatives and
Hedging - Contracts in Entity's Own Equity ("ASC 815-40"). Under ASC 480-10,
warrants are considered liability-classified if the warrants are mandatorily
redeemable, obligate the issuer to settle the warrants or the underlying shares
by paying cash or other assets, or must or may require settlement by issuing
variable number of shares.
If the warrants do not meet liability classification under ASC 480-10, the
Company assesses the requirements under ASC 815-40, which states that contracts
that require or may require the issuer to settle the contract for cash are
liabilities recorded at fair value, irrespective of the likelihood of the
transaction occurring that triggers the net cash settlement feature. If the
warrants do not require liability classification under ASC 815-40, in order to
conclude equity classification, the Company assesses whether the warrants are
indexed to its common stock and whether the warrants are classified as equity
under ASC 815-40 or other applicable GAAP. After all relevant assessments are
made, the Company concludes whether the warrants are classified as liability or
equity. Liability-classified warrants are required to be accounted for at fair
value both on the date of issuance and on subsequent accounting period ending
dates, with all changes in fair value after the issuance date recorded as a
component of other income (expense), net in the statements of operations.
Equity-classified warrants are accounted for at fair value on the issuance date
with no changes in fair value recognized after the issuance date.
30
Stock-Based Compensation
The Company expensed stock-based compensation to employees and non-employees
over the requisite service period based on the estimated grant-date fair value
of the awards. Stock-based awards to employees with graded-vesting schedules are
recognized, using the accelerated attribution method, on a straight-line basis
over the requisite service period for each separately vesting portion of the
award.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment.
Expected Term - The expected term of options represents the period that the
Company's stock-based awards are expected to be outstanding based on the
simplified method, which is the half-life from vesting to the end of its
contractual term.
Expected Volatility - Volatility is a measure of the amount by which the
Company's share price has historically fluctuated or is expected to fluctuate
(i.e., expected volatility) during a period. Due to the lack of an adequate
history of a public market for the trading of the Company's common stock and
a lack of adequate company-specific historical and implied volatility data,
the Company computes stock price volatility over expected terms based on
comparable companies' historical common stock trading prices. For these
analyses, the Company has selected companies with comparable characteristics,
including enterprise value, risk profiles, and position within the industry,
and with historical share price information sufficient to meet the expected
term of the stock-based awards.
Common Stock Fair Value - Due to the absence of an active market for the
Company's common stock prior to the IPO, the fair value of the common stock
underlying the Company's stock options was estimated at each grant date and
was determined with the assistance of an independent third-party valuation
expert. The assumptions underlying these valuations represented management's
best estimates, which involved inherent uncertainties and the application of
significant levels of management judgment. After the completion of the IPO,
the fair value of each share of common stock is based on the closing price of
the Company's common stock as reported by the Nasdaq Capital Market.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on
the implied yield available on
commensurate with the estimated expected term.
Expected Dividend - The Company has never declared or paid any cash dividends
on its shares of common stock and does not plan to pay cash dividends in the
foreseeable future, and, therefore, uses an expected dividend yield of zero
in its valuation models.
The Company recognizes forfeitures of equity awards as they occur.
Fair value of common stock In order to determine the fair value of shares of common stock of the Company when issuing stock options prior to the IPO, and computing their estimated stock-based compensation expense, its board of directors considered with input from third party valuations, among other things, contemporaneous valuations of the Company's common stock. Given the absence of a public trading market of the Company's capital stock prior to the IPO, its board of directors has exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common and preferred stock, including:
? the prices, rights, preferences and privileges of our preferred stock
relative to our common stock;
? our business, financial condition and results of operations, including
related industry trends affecting our operations;
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? the likelihood of achieving a liquidity event, such as an initial public
offering, or IPO, or sale of our company, given prevailing market
conditions;
? the lack of marketability of our common stock;
? the market performance of comparable publicly traded companies;
? U.S. and global economic and capital market conditions and outlook; and
? Common stock valuation methodology.
In estimating the fair market value of common stock of the Company, its board of directors first determined the equity value of its business using accepted valuation methods.
The Company engaged a third party valuation specialist to conduct a valuation, which used its recent preferred stock financing as a starting point and determined the equity value of the company based on the Backsolve method using an Option Pricing Method (OPM) to calculate the implied value based on a market approach. The Company's equity value was allocated using OPM to estimate the fair market value of the Company's classes of equity.
After the completion of the IPO, the fair value of each share of common stock is based on the closing price of the Company's common stock as reported by the Nasdaq Capital Market.
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